Introduction
Special economic zones such as freeports and enterprise zones are often used to attract investment, both domestic and foreign. In this section, we describe freeports and their close cousins, UK Enterprise Zones and Investment Zones, before looking at their post-Brexit impact.
The section draws on papers by the UK Trade Policy Observatory and the findings of the House of Commons Business and Trade Committee inquiry into the performance of English Freeports and Investment Zones, published in April 2024.
Freeports
A freeport is a type of free zone, which is subject to special regulatory requirements, tax breaks and government support. A freeport aims to encourage businesses that import, process and then re-export goods, whereas an enterprise zone aims at general business support or regeneration objectives (such as ‘levelling up’). Freeports can range from secure warehouses to sites where added-value manufacturing occurs before goods are re-exported.
The 2019 Conservative manifesto committed to set up ten freeports around the UK. This followed a 2016 paper from the Centre for Policy Studies by Rishi Sunak. The government published a consultation paper on freeports in February 2020: ‘Boosting Trade, Jobs and Investment Across the UK’. After publishing its response to the consultation in October 2020, the government then invited bids for the ten freeports.
There are currently 13 UK Freeports (see Figure 7.11), with eight in England.
Previously, there were freeports (designated airports or seaports) in the UK until 2012, when the government allowed the UK laws that set them up to expire. The UK had seven freeports between 1984 and 2012, including Liverpool, Southampton, the Port of Tilbury and Glasgow Prestwick Airport. Within the EU, there are around 80 free zones. However, EU freeports are more limited in their powers than other freeports around the world.
Freeports are places where normal tax and customs rules do not apply. At a Freeport, imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside and around the port can manufacture goods using the imports and add value, before exporting again without full tariffs or procedures. However, if the goods move out of the Freeport into another part of the country or as exports, they must go through the full import process and pay tariffs. Note that Freeports may simplify some trade in goods but do little for services.
Businesses operating in Freeports can therefore benefit from:
- Simplified customs procedures;
- Relief on customs duties relating to transhipment, handling and processing of goods destined for re-export;
- Cash-flow benefits of duty deferral until goods are released to the domestic economy (or used within the free zone);
- Added security from the perimeter fence enclosing the free zone;
- Tariff inversion: some finished goods incur lower tariffs than intermediate goods; this means that goods can be imported to free zone tariff-free, processed and sold as a final product incurring lower tariff rates.
However, the benefits of the UK Freeport model are limited. As the UKTPO paper states, the Business and Trade Committee found in April 2024:
- Customs benefits available to Freeports are limited. As UK tariffs are very low, the customs benefits derived from being within the Freeport, would not be very high. Moreover, if Freeports did benefit UK competitiveness, trading partners would be entitled to invoke “duty drawback” provisions in FTAs (including the TCA) to deny preferences to the UK or to use anti-subsidy countervailing duties.
- Some tax benefits at Freeport sites may contribute towards attracting employers and creating new jobs. Government estimates suggest Freeports have created 5,600 jobs in England since their creation. However, evidence received suggests that around two-thirds of these jobs may not be incremental, but jobs that would have been created regardless, or displaced from elsewhere.
- Concerns about governance and transparency. While all English Freeports are governed through partnership boards incorporating both the public and private sectors, the level of business involvement and degree of control by local government varies. The well-documented allegations of financial mismanagement linked to the Teesside Freeport highlight the risks posed by complex governance and weak accountability.
UKTPO also observes that the dual purpose of the current UK Freeport model creates confusion because it aims to both boost international trade and operate as a traditional Special Economic Zone.
Figure 7.11: Location of UK Freeports
UK Enterprise Zones
2012 saw the reintroduction of UK Enterprise Zones with incentives such as:
- Business-rate discounts (up to £275,000 per business over five years);
- Tax breaks for new plant or machinery;
- Location-specific amenities (such as rail links, ports, high-speed broadband);
- Simplified planning process.
There are 61 enterprise areas across the UK: 48 in England, eight in Wales, four in Scotland and one in Northern Ireland.
The experience of UK Enterprise Zones in the 1980s found:
- Success in dealing with dereliction and considerable environmental improvement (e.g. Isle of Dogs).
- Often created in areas that only offered a limited chance of long-term success (for example, in areas with poor transport connectivity or with limited access to large, skilled labour markets, suppliers, customers).
- Inner city zones were more successful at creating new jobs than those outside urban centres and in remote areas.
- Simplified planning processes were not delivered in practice.
- Rather than creating additional jobs, economic activity was displaced:
- Up to 41% of the 58,000 jobs created in the enterprise zones of the 1980s were relocated from elsewhere in the UK.
- The zones were expensive:
- Public sector cost per additional job created in a zone was £17,000 per job in 1994-95 prices.
- Business rates relief and enhanced capital allowances were the main attractions for businesses.
- In practice, business rates relief often led to higher rents, which benefited landlords. Occupiers gained only around 10-55% in urban zones, 30-50% in accessible zones, and between -25 to +45% in remote zones.
UK Investment Zones
Introduced in 2023, there are 13 UK Investment Zones. It is too early to say whether they will be effective, but it’s clearly confusing for businesses and local authorities to have three types of special economic zone with overlapping goals.
EU rules
Medium-sized enterprises are entitled to aid of 10% of the total investment (in addition to any regional aid they have already received), while small companies are entitled to 20% more.
EU state aid rules constrain the options for free zone and enterprise zone operations, but exemptions may be granted if the zone benefits the economic and social development of underdeveloped EU regions:
- Areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions.
- Where aid does not affect trading conditions contrary to the common interest.
Many EU free zones and enterprise zones are in the ‘new’ EU Member States in Central and Eastern Europe. They set up special economic zones in the mid-1990s to attract FDI offering incentive schemes such as tax holidays, reduced corporate income tax rates or customs duty exemptions / deferrals. However, in the run-up to EU accession, these countries had to revise their schemes to align with EU state aid rules.
EU rules mean it’s more difficult for EU businesses to engage in “tariff inversion”.
Post-Brexit impact
Peter Foster memorably describes freeports as ‘an economic red herring’. Based on the evidence to date, the post-Brexit impact of Freeports is likely to be positive but immaterial:
- studies show that the net benefit of free zones is limited:
- confirmed by the Business and Trade Committee’s inquiry in April 2024;
- for US Foreign-Trade Zones, there is little evidence of how many new jobs are net new job creations: their main purpose appears to be to supply the domestic market without having to pay high tariffs on imported inputs.
- when tariffs are low, the benefits of freeports are small:
- UK Global Tariff rates mean that there are not any major differences between the rates for component goods and the final products. This means the benefits from tariff inversion will be small.
- Freeports defer but do not remove duty payments and import VAT, which gives a small gain to cash-flow;
- there may be some potential benefits from simplified customs procedures.